Corporate India began feeling the heat much before Covid surfaced in China late in 2019. The economy had already slowed down significantly and Indian companies, struggling with declining demand, poor cash flows and over-leveraged balance sheets, were vulnerable when the pandemic struck. The virus delivered a massive blow — destroying both demand and supply at the same time. All hope was lost and corporate recovery was seen as a long haul.

India Inc proved everyone wrong and managed a quick bounce-back.

Bouncing back

A recent report by Bank of Baroda Research brings out the extent of recovery. It looked at the performance of 1,789 non-financial companies over a three-year period. Net sales in FY22 rose 35 per cent as against 4 per cent in the previous two years. Net profit jumped 65 per cent over and above the 80 per cent jump in FY21 and a 48 per cent decline in FY20. Interest costs declined by 4 per cent in FY22 as against an increase of 16 per cent in FY20. Interest coverage in FY22 rose sharply to nine times as against just four times in FY20.

These numbers clearly reveal that domestic demand (including pent-up demand) revived sharply and the industry took full advantage of it. Exports were also vibrant. India’s merchandise exports touched an historic high of $418 billion in FY22.

Operating profits were a lot better as the companies cut costs, especially wages, aggressively during the pandemic. Interest costs also declined as overall interest rates fell and companies focussed on de-leveraging their balance sheet.

In FY21, India Inc cut incremental debt by ₹1.05 lakh crore (in the earlier two fiscals, it increased by little over ₹3 lakh crore each year). Companies were able to do this as they sat on excess-capacity and in the absence of any immediate need to expand, chose to repay debt and de-leverage their balance sheet. The insolvency process helped in retiring some long pending debt while the buoyant stock markets enabled entrepreneurs raise equity to retire debts.

However, this smart recovery was not across the board. Micro and small companies continue to feel the pain while sectors like telecom and education even registered a contraction.

Large metals, mining and auto companies did better than others. On the whole, a good show given the circumstances.

Bleak outlook 

Can India Inc build on this recovery in FY23? Unlikely, as a lot has changed in the last few months for that to happen. Geopolitics, run-away inflation and lockdowns in China as the country pursues a zero-Covid policy have all made FY22 recovery look like a distant past.

Economic slowdown: Global economy is slowing down yet again. The World Bank has cut 2022 global growth to 2.9 per cent (it was 5.7 per cent in FY22). It has also warned of stagflation and if experts are to be believed, the US is headed for a recession. This could impact exports. Domestic demand too may weaken. RBI estimates India’s GDP growth to drop to 7.2 per cent in FY23 from 8.7 per cent in FY22.

Run-away inflation: The central bank also expects inflation to average 6.7 per cent this fiscal. Such an inflation will eat into the disposable income and hurt spending. This could slow urban offtake and thwart a revival in rural demand which has been sluggish for the past 12 months or more.

Also, what makes matters worse is RBI’s move to tame inflation by raising the benchmark interest rates aggressively. In about a month’s time it has raised repo rate by 90 basis points (bps) and economists expect another 110 bps hike by mid-2023. This will not only dent retail demand but also increase the borrowing costs for companies.

Margins under pressure: A sharp increase in input costs have already eaten into the margins of most companies. Asian Paints’ margin in Q4 FY22 shrunk by 448 bps while Nestle’s fell by 310 bps. Cement companies on an average saw a 400-500 bps erosion in their margins. Many companies have tried to pass on the higher costs to the customers but with limited success. Price hikes have caused volumes to drop. With no sign of an end to the war in Ukraine and sanctions against Russia expanding, the rise in input cost will continue but companies will find it difficult to pass it on to the consumers. That would mean a further hit to their margins.

Weakening Rupee: The geopolitics has also unsettled the rupee which was stable most of FY22. It has depreciated 4 per cent since Russia invaded Ukraine. That coupled with interest rate increase in developed markets have seen foreign portfolio investors sell and exit India, further accentuating the pressure on the currency. Experts are warning that the rupee can touch ₹79 to a dollar or more.

Rising interest cost: Indian companies took advantage of a stable rupee and low interest rates in developed markets to access low-cost borrowings in the last couple of years. External Commercial Borrowings (ECBs) in FY20 touched a record $51 billion before dropping to $34 billion in FY21 and recovering marginally to $38 billion in FY22.

With rupee depreciating and interest rates rising in developed markets, ECBs are no longer attractive. ECBs in April were just $361 million — possibly lowest ever. Stock markets have also declined.

Sensex has dropped 12 per cent between its peak last October and now. If there is no quick revival, the IPO market will also lose its sparkle. That would mean companies will have little option to offset rising domestic interest rates.

Despite the gloom there are silver linings. Global buyers’ China+1 policy has accelerated, especially after China imposed strict lockdowns to fight Covid. That should help Indian manufacturers to expand their exports. A normal monsoon is predicted.

If it is so, rural demand will revive strongly boosting the economy. And finally, India Inc is today in a much better shape to face crisis having deleveraged its balance sheet, cut costs and emerged wiser from the pandemic. So, all is not lost but tough time is definitely ahead.